How Wealth Behaves, and the Eventual Adoption of Cryptocurrency Assets
A financial and technological innovation was deployed in 2009: Bitcoin. Ever since, people have continued to develop and build cryptocurrency assets, largely unnoticed. I will argue that the use and ownership of cryptocurrency assets are very much the shape of things to come, and that the widespread adoption and leverage of cryptocurrency assets is inevitable.
Financial Autonomy
Financial autonomy is a curious phenomenon. It is intuitive: to varying degrees we each understand that we have some measure of financial autonomy over our assets and wealth. We get to decide how our wealth is spent, invested, and shared. Hopefully, we enjoy laws and customs that protect private property, with fair judiciaries and minimal risk of state intervention or physical violence. We follow the rules to the best of our abilities (or intent) and adhere to a social contract to ensure that what’s mine is mine and what’s yours’ is yours’. But — if you break that social contract in an egregious way, the state or some other actor has always had the means to take your assets away from you. Whether by court order or physical force, your wealth and assets are only yours’ so long as civil society concurs. That is, the degree to which you have financial autonomy has always required the concurrence and consent of civil society (everyone around you).
The idea of financial autonomy should not be a controversial or unfamiliar one: after all, every year you and I file our taxes to determine what’s ours, and what belongs to the state. Nobody pays extra taxes (or extra for anything) when they don’t have to. Indeed, most states or governments will credit you back if you’ve paid too much. The same principle applies to all scales of wealth: whether you are filing your personal taxes, or you are an international enterprise minimizing tax exposure around the world. This idea of financial autonomy can also be observed in our everyday decision making around spending and expenditure: as a general rule, one does not pay more than they have to for anything — one will shop around, seek value, and check receipts. One will not pay more than one has to, if they can help it.
The concept of fiduciary responsibility is one of trust, to trust a third party to act in your best interest in terms of maintaining, securing, and growing your wealth (in their hands). There is no terminology for exercising fiduciary responsibility unto one’s self, because the fiduciary responsibility we perform unto ourselves is instinctive. Whether as individuals, professionals, or as organizations, we always protect our wealth to the best of our ability and intent. This is how wealth behaves. Nobody discards wealth willingly. One might mismanage or relinquish their wealth, but as a general rule, we do not set fire to our own property.
Bitcoin, Cryptocurrency Assets
In 2008, an anonymous person or group of persons under the pseudonym Satoshi Nakamoto issued the Bitcoin protocol whitepaper, describing a solution to a ‘Peer-to-Peer Electronic Cash System’. Shortly afterwards (2009), Bitcoin’s first genesis blocks were mined, marking the existence of the first decentralized cryptocurrency market and assets. The factors that made this innovation possible rely heavily on the state of human innovation and wealth at the time Bitcoin was designed; telecommunications, ubiquitous access to personal computing, electricity, wealth. Decentralized cryptocurrency assets are not simply a clever idea — a confluence of wealth, technology and ingenuity are what made its value proposition a reality when it did. I will argue that the necessary consequence of this innovation is that wealth will largely and eventually flow into decentralized cryptocurrency assets.
Bitcoin as a technological innovation has proposed a new way to manage and secure wealth and exercise financial autonomy (“sovereignty” is a term that is used in industry as well). Whereas historically wealth and financial autonomy has always required the consensus of civil society, cryptocurrency assets categorically do not. Decentralized cryptocurrency assets present a new paradigm to the management of wealth and financial autonomy; consensus over value and ownership is built into decentralized blockchain technology by design. Like so many other technological achievements throughout human history, we’ve automated and made accessible a kind of utility that was otherwise extremely complex to maintain and limited to the pulleys and levers of sovereign states and the threat of coercive force.
This is a subtle difference from the kind of financial autonomy that has only been possible very recently (Bitcoin). If the value is not immediately obvious, I will argue that it is profound. What happens when you automate consensus over the ownership and value of wealth? How does wealth always behave? If you accept the earlier premise that financial autonomy is something that wealth instinctually and intuitively gravitates to — it should logically follow that removing the risk of concurrence by civil society is a valuable proposition to any scale of wealth.
If this is true, why isn’t everyone doing it?
If my observations above may be compelling, you may be looking around and wondering well, if this is so obvious, why aren’t we talking about it? Why aren’t we all doing it, why isn’t everyone seizing this financial autonomy? To such reactions I have a few responses:
This has only been possible or accessible for twelve years
The first is reason a self-contained statement, and also a bit of a cop-out. But I don’t think it would be unfair to suggest that currently, cryptocurrency knowledge and engagement is largely concentrated in technology and finance enthusiasts or professionals. The notion of financial autonomy as I’ve described it seems like a libertarian fantasy; far from attractive, relevant, or useful to how we might actually transact and manage wealth day to day. The industry and technology are young, and not yet developed enough for newcomers to feel immediately comfortable. That is an obstacle — but it does not detract from the merits of cryptocurrencies and financial autonomy.
Most of us don’t actually have very much wealth
The second reason is relevant to the first: most of us don’t actually have that much wealth for this to be relevant in the first place. I suspect these observations bear little weight on most anyone who relies on a typical salary (unless of course you’re into cryptocurrency). And what wealth we might have is often tied up in traditional assets and investments that offer necessary utility (e.g. a home, vehicle, retirement savings etc.). You may never find occasion to participate or engage with cryptocurrency assets. But as wealth scales, as it begins to represent an abstract number (beyond obvious utility), these observations should become more relevant and compelling. Because if your wealth and resources can escape the oversight of others, do you not have a responsibility and an opportunity to secure and leverage it as you see fit?
It is not easy or simple at all, particularly as wealth scales
The third reason requires a bit more explanation, but is also related to reasons one and two. Even if you knew nothing about Bitcoin or cryptocurrency assets, some googling, accounts, and transactions could potentially see you acquiring cryptocurrency assets (private keys) inside of a day. What I’ve described is accessible at the scale of wealth and capital that may be intuitive to most readers — but consider this: there is no google search for how to do this with significant wealth or capital (this is changing rapidly). There is limited understanding of the best practices of managing great wealth in an automated consensus environment.
That is, while it may be easy for me as an individual to acquire cryptocurrency assets and reasonably secure it, that is not currently the same for say, a bank, a hedge fund, or a wealthy billionaire. The control, security and governance of wealth becomes exponentially complex (technically and logically) as the number of stakeholders over the wealth/capital grows. Anyone that has ever executed a cryptocurrency transaction from their own wallet understands the gravitas of the transaction while they await confirmations — it has to be done thoughtfully and carefully, because there’s no turning back. Because how vast are your responsibilities over your wealth, when you can make unilateral decisions on how it is spent (private keys)? That is, while decentralized cryptocurrency assets make financial autonomy possible and accessible, it does little to make the general management of wealth any easier.
Price Volatility (or, competing responsibilities)
These cryptocurrency wealth management challenges aside, there is an obvious competing responsibility over wealth that may outweigh the benefits of acquiring cryptocurrency assets at all. In particular, I suspect most prospective participants are wary of the very volatile history of its value. How am I being responsible with my wealth investing in Bitcoin, if its value is constantly swinging up and down? This is a fair concern and ultimately for some it may always weigh against any of the potential benefits of acquiring cryptocurrency assets.
But this line of thinking lays in the realm of investment risk. That is, if I invest $x dollars now, will it be worth more for me to utilize in the future? While this is intuitive to most; this is not how great wealth behaves. As stated earlier, as wealth scales it begins to become an abstract number and the utility of that wealth no longer becomes obvious. There is no future utility of great wealth — only constant diligence and management to invest, grow, and maintain that wealth lest those opportunities (and the nice things they afford) be forfeited to others.
It is my goal to direct your attention away from investment risk, and to focus on the risk of concurrence. Concurrence has been an enduring risk to wealth throughout human history. But from 2009, that risk became something that could be mitigated almost completely (almost, as to not underestimate the reach of our regulators / law enforcement) — and if you are in any way involved with managing the risk of assets under your management, whether as an individual or a professional or as an entity you must at least consider the potential value of hedging your assets against the concurrence of civil society (if the law allows). That is what the principle of hedging is.
Cryptocurrency assets are a final-ish frontier in this regard, hedging for hedging’s sake. More secure and reliable than gold, oil, or USD, each of which whose total supply is difficult to measure, and whose production is opaque and determined by a very few. These arguments are not about the price of Bitcoin now and what it may be in the future, they are arguments for securing wealth and hedging against risk in an absolute way that was not possible before. And I’ll state it again: I suspect this idea becomes more compelling as wealth scales (up). After all, wealth generally tends to skirt oversight as it scales already.
State Intervention
Cryptocurrencies as an asset class seems to challenge the power of centralized oversight over wealth. If I can extract my wealth from whatever jurisdiction I reside, doesn’t that equate to less leverage for the state over me and my wealth (e.g. the state cannot tax my crypto transactions)? Not necessarily.
Centralized and decentralized markets present their own value propositions that may be exclusive of one another. Centralization makes sense when it comes to say, the ownership of your home. You want security beyond just a digital representation or token of your ownership — you require the state to enforce your claim to your home, to prevent someone else from just squatting on your property. But the value proposition of cryptocurrencies is not meant to challenge centralized systems that make sense, they are meant to challenge centralized systems that are inefficient or inaccessible (traditional banking).
Once wealth scales to a measure where oversight becomes an obstacle, wealth always gravitates towards escaping that oversight if it has the means or resources to do so. This can be seen in how strategies are deployed via corporate structuring, clever accounting, and minimization of tax exposure — people and entities simply have a propensity to restrict oversight over their wealth, if they are capable, and can do so within the confines of the law (or not if they don’t care). Cryptocurrency assets are a novel and superior method to achieve this pervasive behavior of wealth.
Only private keys provide access to cryptocurrency assets. And with this, people are coming up with all sorts of value propositions around the potential for cryptocurrencies. This is what every cryptocurrency after Bitcoin is, different variations on the foundational value proposition of decentralized assets. Whether it be faster transactions, interest generation, privacy or anonymity; these are all value propositions that at their core leverage the concept of decentralized blockchains. These are all vying to become open-source resources, for any one, any wealth, to leverage to whatever ends. In the future, in aggregate, cryptocurrencies may present a product suite you may be familiar with at your bank: products resembling deposit accounts (Bitcoin), interest generating accounts, liquidity pooling — Bitcoin will always be Bitcoin, but the development of cryptocurrency assets with financial utility continues at large.
As time passes, I expect events around the world will continue to nudge wealth in the direction of cryptocurrency solutions, so long as it remains possible for people and entities to acquire cryptocurrency assets. We will be reminded, again and again, that centralized decision making and concurrence from civil society are far from reliable, fair, or just. And we just might remember (or learn) that through improbable human ingenuity, there is now an alternative. How did your wealth fare in 2020, 2008, 1987, 1929? How strong and resilient are your society’s civil institutions and economies? Will they remain so? For how long? Why accept these risks at all when you can hedge against them?
There is no neat conclusion or ‘so what’ to what I’ve written above. I do not write this to compel anyone to act, nor to do any further reading on the subject. I cannot prescribe what one should do if the above logically makes sense, because the industry is still in its infancy and the infrastructure to allow wealth to actually flow in to cryptocurrencies is still being built, right now.
Once the regulators catch up, and once the technology is deployed and matured — will wealth flow? Time will tell, but I expect it will.
